Mohawk Industries, Inc. (MHK) Q2 2025 Earnings Report, Transcript and Summary

Good day, and welcome to the Mohawk Industries Second Quarter 2025 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to James Brunk, Chief Financial Officer. Please go ahead.

Thank you, Asia. Good morning, everyone, and welcome to Mohawk Industries quarterly investor conference call. Joining me on the call today are Jeff Lorberbaum, Chairman and Chief Executive Officer; and Paul De Cock, President and Chief Operating Officer. Today, we'll update you on the company's second quarter performance and provide guidance for the third quarter of 2025. I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 which are subject to various risks and uncertainties, including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include discussion of non-GAAP numbers. For a reconciliation of any non-GAAP to GAAP amounts, please refer to our Form 8-K and press release in the Investors section of our website. I'll now turn over the call to Jeff for his opening remarks.

Thanks, Jim. In challenging conditions across our regions, our results reflect the impact of our ongoing operational improvements, cost containment actions and market development initiatives. Our net sales for the second quarter were $2.8 billion, essentially flat as reported and on a constant basis. Our premium residential and commercial products and new collections introduced during the past 24 months benefited our performance. We generated second quarter adjusted earnings per share of $2.77 with strong productivity and restructuring actions as well as favorable FX impact and lower interest expense, offset by higher input costs and plant shutdowns. Our restructuring actions are on schedule and delivering expected savings as we close high-cost operations, eliminate inefficient assets streamline distribution and leverage technology to improve our administrative and operational costs. Our global operations team continued to identify productivity initiatives to lower our costs through enhancements to equipment conserving energy, optimizing our supply chain and reengineering our products. Our industry faced continued pricing pressure from lower market volumes, which we mitigated through strengthening product and mix. During the quarter, we generated approximately $125 million in free cash flow, and we purchased about 393,000 shares of our stock for approximately $42 million. Our Board recently approved a new authorization to acquire $500 million of the company's outstanding stock. We are confident in our strategies to deliver long-term profitable growth as the industry recovers from this cyclical downturn. A dominant trend across our geographies is consumers' deferral of large discretionary purchases, which has reduced demand in our industry for almost 3 years. Geopolitical events, inflation and low housing turnover are contributing to market uncertainty that is limiting residential remodeling and new construction. The commercial channel continues to outperform residential. However, the Architectural Billing Index in the U.S. is forecasting slowing conditions. Available U.S. housing inventory has risen to its highest level since 2007, though elevated housing costs and high interest rates are constraining sales of both new and existing homes. In this challenging market, builders are offering price reductions and buying down interest rates to encourage purchases. While housing turnover has historically driven remodeling, we believe that families remaining in their homes longer and increasing multigenerational household will require additional renovation to meet evolving family needs. The Federal Reserve has postponed interest rate cuts while monitoring inflation and employment trends. Forecasters believe that Fed will cut rates twice in the second half of this year, given potential market weakness. In June, the European Central Bank cut rates to 2% to stimulate the economy and the housing market. The ECB move comes as inflation has slowed to their target lower interest rates should support increased consumer spend, discretionary spending and business investment. The European housing market varies by region, though a shortage of units and affordability are common issues. In June, Germany's new government approved legislation to expand home construction by removing barriers that delayed building projects. Since the pandemic, European households have built up record levels of savings which combined with lower interest rates should encourage housing sales. Given the increase in tariffs, we're emphasizing the benefits of our locally produced collections and leading position as a North American manufacturer. We have begun to address the implemented tariffs through price adjustments and supply chain optimization. Earlier this month, the U.S. government set a new deadline of August 1 for countries to complete tariff negotiations while also announcing specific tariffs on key trading partners. We are continuing to monitor the changing tariff levels and will adjust our strategies as they evolve. On July 15, we released our annual sustainability report, which is currently available on our website, embracing sustainable processes and products aligns our commitment to improve our operations and provide industry-leading features and benefits. We continue to invest in product circularity material optimization and green energy to benefit our customers, the environment and our results. This year, major media outlets have recognized Mohawk for reducing our carbon footprint, fostering innovation and developing a talented organization. Now Jim will review our financial details for the quarter.

Thank you, Jeff. Sales for the quarter were just over $2.8 billion. That was flat versus the prior year as reported and on a constant basis due to favorable product and channel mix led by our hard surface business in Flooring North America in our commercial business across the enterprise, partially offset by negative volume and continued price pressure. Gross margin for the quarter was 25.5% as reported and excluding charges, was 26.4%, a decrease of approximately 70 basis points versus the prior year, primarily due to higher input costs of $44 million, lower sales volume of $22 million and increased shutdown costs of $18 million partially offset by productivity gains of $47 million and favorable FX of $15 million. SG&A expense as reported was 18.8% of sales and excluding charges was 18.5%, relatively close to the prior year. It gives us an operating income as reported of 6.7%. Nonrecurring charges for the quarter were $34 million related to restructuring actions and the associated costs undertaken by all segments which, in total, will result in annual cost savings in 2025 of approximately $100 million. That gave us an operating income on an adjusted basis of $223 million or 8% of sales. That's a decrease of approximately 120 basis points as the benefit from strengthening productivity and restructuring initiatives of $57 million and FX of $9 million were offset by the increased input cost of $63 million, lower sales volume impact of $21 million and higher shutdown costs of $18 million. Interest expense for the quarter was $5 million, a decrease from the prior year level due to lower overall debt balance and a benefit of interest income across the business. Our non-GAAP tax rate for Q2 was 19.3% versus 20.9% in the prior year due to geographic dispersion of our income and certain onetime benefits. We are forecasting a Q3 and full year tax rate to be approximately 19%. That gave us an earnings per share as reported of 2.34% and on an adjusted basis of $2.77. Turning to the segments. Global Ceramic has sales that just exceeded $1.1 billion. That was a 0.5% increase as reported or 1.1% on a constant basis as our product and channel mix performance offset the weakness in volume. The segment benefited from our new product introductions, leading decorating technology and the strength of our commercial business. Operating income on an adjusted basis was $90 million or 8.1%. That's a decrease of approximately 40 basis points on an adjusted basis as the benefit from price and mix of $27 million and strong productivity of $70 million was offset by an increase in input costs of $36 million and lower sales volume of $16 million in the quarter. Flooring North America had sales of $947 million. That's a 1.2% decrease due to lower volumes, mainly in our soft surfaces, partially offset by favorable product and channel mix, driven by our resilient and laminate businesses. In the U.S., residential modeling remains slow with the commercial channel still outperforming. Operating income on an adjusted basis was $69 million or 7.3% for a decrease of approximately 130 basis points versus the prior year as higher input costs of $23 million, unfavorable net impact of price and mix of approximately $9 million and increased shutdown costs of $11 million were partially offset by the benefit of strengthening productivity of $32 million. Flooring Rest of the World had sales of $734 million. That's a 1% increase as reported and 3% decrease on a constant basis. The decrease is primarily due to the continued pricing pressure in the residential remodeling channel as consumers deferred large discretionary purchases. The ECP though, has lowered rates further, but has not yet driven increases in housing or remodeling activity. Operating income on an adjusted basis was $76 million or 10.4% of a decrease of 220 basis points versus the prior year, primarily due to unfavorable net price and mix of $19 million partially offset by productivity gains of approximately $8 million. Given the weak residential market, we are lowering costs by removing inefficient assets and reducing operational and administrative expenses. Corporate and eliminations was $13 million for the quarter, in line with the prior year, and our full year 2025 expenses are estimated to be approximately $50 million. Taking a brief look at the balance sheet. Cash and cash equivalents were $547 million for the quarter, with free cash flow of $126 million in the quarter as we also repurchased shares of approximately $42 million. Inventories were just increased above $2.7 billion. That's an increase of $130 million for the quarter, primarily due to FX and an increase in imported inventory due to new tariffs. Property, plant and equipment was just above $4.7 billion, with Q2 CapEx of $80 million compared to a D&A of $156 million. The company has reduced its planned investments to approximately $500 million in 2025 and with D&A for the full year forecasted at approximately $610 million. 40% of the projects focused on cost reduction and product innovation and 40% on maintenance and other with the remaining 20% to complete our growth initiatives. Overall, the balance sheet and cash flow outlook remained very strong with current net debt of $1.7 billion and leverage at 1.2x. Now Paul will review our Q2 operational performance.

Thank you, Jim. In our Global Ceramic segment, our results in challenging market conditions benefited from sales of our premium products, strength in commercial projects, expanded distribution and operational improvements. We have pressure on pricing from excess industry capacity and pressure from imports. Our product and channel mix strengthened from our superior product portfolio and brand leadership. In the quarter, we minimized the impact of inflation on input costs through select price increases and restructuring projects as well as numerous productivity initiatives, including refinements to manufacturing processes, supply chain optimization and increasing distribution efficiencies. In the U.S., our commercial performance was solid, while residential sales remain challenged from softness in remodeling and new construction. We are leveraging the strength of our nationwide distribution system to target a wider range of contractors, specialty retailers and commercial projects. To counter rising input costs, we made pricing adjustments on higher-value products while increasing productivity actions. As tariffs are evolving, we are promoting our domestically produced floor and wall tile and our expansion of quartz countertop capacity in Tennessee will allow us to produce more of our offering in the U.S. Home remodeling in Europe remains constrained, while the commercial channel continues to perform well, led by the hospitality sector. In major European cities or designer showrooms and educational events for architects and designers have increased our participation in commercial projects and boosted sales of our premium collections. Sales of our porcelain slabs with more realistic visuals or growing in both traditional channels as well as for use in countertops and furniture manufacturing. In Brazil, higher interest rates have slowed the domestic market, though exports benefited sales and our mix improved. We offset higher input costs through productivity gains from operational enhancements and realigning manufacturing assets. The Mexican market remains soft, and we have implemented select price increases introduced more porcelain and innovative polished collections to enhance mix and partner with distributors to add more Daltile branded stores. Restructuring initiatives in our Mexican operations are on track to improve our market position and lower our costs, with benefits anticipated in the second half of the year. Our Flooring Rest of the World segment managed through difficult market conditions with additional operational enhancements and cost containment actions. Residential remodeling remains soft in Europe and new construction has not kept up with population growth. A rebound in home building and renovation will be needed to meet growing demand. Pricing and mix pressure remains strong in this challenging market, and we are executing promotions to optimize our results. We took many actions to increase productivity in our operations and supply chain as well as enhance our material costs. We are removing inefficient assets, reducing operational and administrative costs and consolidating operations. We continue to invest in recycling waste and green energy to reduce costs. In the flooring category, our laminate performance improved as we have progressed through the quarter. We are expanding our LVT distribution across channels with new collections and customer relationships. While our commodity panels business remains under pressure from excess capacity in the market, our mix benefited from the expansion of our high-end decorative collections and entry into new geographies. We increased our sales volume of insulation boards despite soft demand, and we are expanding distribution in Germany and Poland to prepare for a new Eastern European plant. In Australia, our hard surface offering performed well, and we are expanding our LVT alternatives. Carpet sales remained under pressure, and the recent election has improved the economic outlook and orders are strengthening. We implemented price increases in June and are improving efficiencies in our operations. Flooring North America segment sales were about flat for the quarter, with strong performance in hard surface categories across all channels. Rising housing inventory and lower mortgage rates could improve home sales and residential remodeling. While pricing pressure remains strong in the market we minimized the impact with enhanced product mix and cost reductions from stronger material yields, supply chain optimization and reduced marketing costs. We are managing inventories with reduced production and are making targeted investments to support sales and improve operations. Our restructuring actions have streamlined our operations by rationalizing inefficient assets, closing higher cost production and simplifying our product offering. We continue to work with customers and suppliers to manage the impact of tariff costs as the situation evolves. We had strong sales growth in the quarter from our LVT, laminate and hybrid products with retailers and builders embracing our superior visuals and features. Manufacturing enhancements at our East and West Coast LVT operations have increased operational efficiencies, improving our cost position with a strong domestic portfolio to support our growing LVT sales. Our premium fashion and value collections led our soft surface performance as residential corporate sales remain under pressure due to reduced renovation. Our commercial carpet tile and hard surface order backlog is strong, led by the education and hospitality sectors. I'll now return the call to Jeff for his closing remarks.

Thanks, Paul. As we focus on market development, operational improvements and cost containment, we are continuing to take actions that will optimize our performance in the current market. Ongoing inflation and low consumer confidence are constraining industry sales and the timing of the inflection point remains unpredictable. To improve sales, we're leveraging the strength of our portfolio, superior service and brand value to expand our business with current and new customers. Through pricing -- the pricing pressure in our markets remains elevated. We are improving our mix through our premium collections, commercial sales and recent product introductions. Input cost pressures will continue with the impact peaking in the third quarter as they flow through our inventory. To mitigate these higher costs, our teams will continue to execute productivity initiatives in all aspects of our operations. Our restructuring actions should deliver approximately $100 million in benefits this year while strengthening our operations for the future. Evolving U.S. trade policy should benefit Mohawk for approximately 85% of our U.S. business is produced in North America. We will manage the impact of tariffs through supply chain enhancements, cost optimization and price adjustments. Our guidance does not include the potential impact from new tariffs, which have not been finalized at this time. Given these factors, we expect our third quarter EPS will be between $2.56 and $2.66 excluding any restructuring or onetime charges. Historically, down cycles in our industry are followed by several years of sales growth from pent-up demand. During the past 3 years, we have made targeted investments to improve our operational performance, cost position and our product features. Through these actions, we are strategically positioned to respond to today's challenges and capitalize on opportunities as the industry recovers. We'll now be glad to take your questions.

[Operator Instructions] The first question comes from Mike Dahl with RBC Capital Markets.

I want to start with foreign North America pricing environment or competitive environment. I think it's interesting because in 1Q, price/mix was positive and the comp was easier in 2Q. You've got all the premium collections that seems to be doing better. Can you just help us understand a little more of that inflection back to negative net price/mix, maybe quantify kind of how you fared versus the market or give us a little more color on that dynamic on price/mix and how we should be thinking about through the back half of the year in Flooring North America?

Yes. So in Flooring North America, our segment sales were about flat for the quarter, with stronger performance in the hard surface categories. Residential remodeling remains slow and commercial continues to outperform our residential business, LVT enhancements have improved our efficiency and costs, and our teams continue to execute productivity initiatives across our operations. Our restructuring actions have enhanced our operations by rationalizing inefficient assets, closing higher cost production and simplifying our product offering. Now from a margin perspective, we have a lot of productivity initiatives ongoing, and our mix improvements in the quarter were offset by cost inflation, price pressure and lower production. Our productivity initiatives and restructuring actions are progressing as expected, and they are lowering our costs, and we are continuing investments in new products to prepare for the recovery of the category.

And Mike, from a second half perspective, I would expect that the favorable mix, both product and channel would minimize the impact of the pricing pressures. So I would expect the year-over-year to see improvement as you go through Q3 and Q4.

Okay. Yes, that's very helpful. And then my second question, the comments about this guidance does not include any potential impacts from the new tariffs, I think, clearly, the way things roll through your P&L, it seems like that would take a little bit of time to flow through anyway. But just based on all the moving pieces, if tariffs were to stay in place at the currently articulated rates that you see around the globe, do you have any updated or refined sense of how much cost pressure that you would have to offset?

I mean if you start out with the initial tariffs were about 10%, and we're implementing changes presently in the marketplace, and we'll continue doing that. The present reciprocal tariffs have been announced from 10% to 50%. The negotiations are continuing on these tariffs almost changing by the day. And given that we don't know what they are and it looks like they're going to have significant differences from where they're starting, we're not going to know until we get to the end. You're right that assuming that they don't get implemented until late in the third quarter, the impact will be practically none as it no matter what they are, and we're going to adjust when they're finalized as they're needed. In addition to that, I guess, we won't know the impact that they're going to have on the economy until later and if it will have any impact on our industry.

The next question comes from Sam Reid with Wells Fargo.

The release -- just sticking on the topic of competitive pricing, the release and the prepared remarks did make a few references to competitive price dynamics. I just wanted to drill down and talk through kind of where you're seeing competitive pricing most acutely in the U.S. Are there any indications that some of your peers have been pushing through price from tariffs? Or are you finding that, in general, the peers are more or less kind of holding or perhaps even pulling back on price given what we're seeing from a volume standpoint.

Thank you for your question. We've announced 8% increases that we are implementing in the market as we speak. The industry will have to increase further with higher tariffs. There's currently some delays on impact with inventory in the system, and we're obviously also reviewing other alternatives to optimize our supply chain to compensate for the tariffs.

That's very helpful. And switching gears here, I believe, as part of your ERP transition that you might actually have better visibility and real-time data into some of your kind of smaller customers, particularly some of your mom-and-pop specialty retail customers. Just curious, one, if that's the case. And then just two, kind of how you might be able to leverage that data? Is there an opportunity here to perhaps better manage pricing and inventories in that channel presumably now that you might have a better read on real-time trends?

We have some better analysis that we can see of the different customers. We're trying to use it to understand it and make better decisions through it. But in general, it hasn't dramatically changed our strategies and what we're doing at this point.

The next question comes from Susan Maklari with Goldman Sachs.

My first question is going back to the product. You mentioned several times in your prepared remarks, some of the benefits that you're starting to see from the newer collections that you've launched. Can you talk a bit about where those products are in terms of getting into the channels? And any thoughts on how they could perhaps drive share gains and some more benefits to result in the upcoming quarters?

Yes, we've been introducing different products over the last few years. The recent introductions in the first part of the year are going into the market now and growing in what they're doing. We've introduced a lot of things because we think we're positioning ourselves as we come out of the recovery. Some of the big things in it would be ceramic, we have significant investments in new digital printing technologies that create 3-dimensional visuals, it's able to have different color intensity as well as different ways to create surface textures. In LVT, we've introduced multiple alternatives for vinyl PVC that actually give better performance to the consumer. In laminate, we've introduced the next generation of aesthetics as we go through. We are introducing in countertops, new veining technology as well as getting ready to start up a new plant in the third quarter. And in carpet, we put in a whole new collection on super premium collection just as limited examples of the things that we're doing.

Okay. That's helpful. And then when we look at the margins this quarter, it was nice to see how they came together even with the pressures that you're facing in the operating environment. Any thoughts on how we should be expecting profitability to trend in the back half of this year? And then any thoughts on the outlook further as you think about conditions perhaps improving over time?

Let's see if I can give you some color to think about. We do anticipate that the second half conditions are going to remain challenging. At this point, we don't see any improvement in the market conditions. Mortgage rates, inflation and consumer confidence are still constraining the industry. We're taking a lot of actions to self-help ourselves with -- through our sales actions, leveraging our product offering. We just talked about executing productivity initiatives across all the parts of the business. We are selectively increasing prices across our various geographic portfolios where we can get price. We expect the third quarter to follow the same historical seasonality given that European vacations impact sales when they all go on vacation in August. Around the world, central banks are reducing interest rates, which we believe could stimulate spending in housing sales. We'll continue to benefit from our restructuring actions that will total over $100 million this year. Inflation should peak in the third quarter and given higher input costs from the earlier period should flow through our cost in the third period. We have to respond to increases in tariffs as required once we know what they are and can understand the impact of different supply points. Assuming no changes in the present trend, we expect improvement in our fourth quarter results over last year.

The next question comes from Timothy Wojs with Baird.

Maybe just in the U.S. or in North America, specifically in hard surface, as you look at kind of the first half, how do you feel that Mohawk is performing relative to the market, specifically in the hard surface category in the U.S. based on what you can see?

Yes, we're performing well compared to the market. Our premium -- waterproof laminate sales are expanding. And the product is perceived as an excellent alternative to LVT in both residential remodeling and new construction. Our price and mix improved but was partially offset by cost inflation. And we think that our domestic laminate should benefit as import tariffs increase other alternatives. And also on the LVT side, our sales increased as we enhanced our portfolio. We are expanding both our sourced and manufactured volumes. And our new hybrid vinyl alternatives with improved visuals and higher performance are being very well accepted in the market.

Okay. Okay. Great. And then just, I guess, kind of piggybacking on the answer from the last question just on Q4, maybe being better on a year-over-year basis. What would be kind of the key drivers to that on a year-over-year basis? Is it just lower shutdown costs and productivity kind of driving that? Is it something around kind of price cost? Just any more kind of details as you kind of see it today.

Thanks, Tim. We -- first of all, we expect normal sales seasonality from Q3 to Q4. As Jeff mentioned, the peak inflation that should hit in Q3 should ease as we go through the fourth quarter, so that's going to help benefit. We'll also see favorable impact from price increases, the stronger mix that we've achieved so far this year, restructuring and productivity actions. And so assuming no changes from those present trends, we do expect the fourth quarter results to be better than the prior year.

The next question comes from Michael Rehaut with JPMorgan.

So just to clarify on the comment from before, Jim, when you talk about results or profitability in 4Q being better year-over-year, is that -- I would assume that applies to not just EPS, but consolidated margins as well?

Yes, because you're looking at inflation still being in place but lower than the peak in Q3. We're still getting the benefit from productivity, both from the restructuring and ongoing initiatives. We see favorability and mix as well. So all those things will help in terms of both the sales and the margins.

Great. No, that's good to hear. Secondly, I was hoping to go back to a prior question about competitive pricing perhaps in the U.S. and in other regions as well. Just would love to dial down and get a little bit better sense. I think the question was around which product categories perhaps you're seeing competitive pricing in? And how pervasive is that? I know you -- I think been discussing this before, you guys talked about maybe what you're trying to do to address it in terms of price increases, if I heard right, but just wanted to better understand which price points and which product categories you're seeing that, particularly in the U.S. and how that's evolved over the past year, perhaps?

I think the best way to try to start it is that with the industry volumes being down for 3 years and the low volumes that the industry is at with a high capital cost and fixed cost levels that the industry has, there is -- we think we're at the bottom. The prices have declined to where we think there's nowhere for them to go in general as we go through. In addition, the industry -- and now you get into each segment and each geography, there's different pricing pressures in different ones and some of the products and categories. We've announced price increases and the industry has in different markets. And so we're raising prices where the industry allows us to get it. And -- but -- and it's going to help us. But the inflation is still here. If you look at energy prices, chemical prices, I think they tended to peak in the first part of the year, and those are flowing through our cost now, and we think we'll be -- get some help from it as we get on to the fourth quarter, but I don't leave you, there's still plenty of inflation that we have to recover within it. The -- getting back to the tariffs, the tariffs we have to understand before the last move, what these geography is going to be and where they are to determine what the best options are available to us, and we'll take whatever actions we need to. We believe that the rates are so high that the industry will pass them through and it's being a little confused by inventory in the channel. So there's some a little earlier and later than others, but they're all going to have to move.

And Mike, it's very, very important. Obviously, any discussion that we have about tariffs is to remind you that we have substantial local production in ceramic carpet, laminate sheet vinyl, LVT and quartz countertops, which represents about 85% of our U.S. business. So it's really critical to hone in on track that we have that strong local footprint.

Yes. No, I appreciate that. I mean maybe just to squeeze one last one in. Have you seen in the last -- in this past quarter, or 2 or to the extent you've seen it, I'm curious if you expect it to continue into the third quarter. Any type of abnormal competitive actions by importers either stuffing the channel or being more aggressive in the near term in response to tariffs that -- and what type of impact that might have had on your results?

I think the best way to answer it is, you have to separate out the importers who are trying to raise their inventories ahead of ahead of anything as we are. And you can see in our numbers, we've raised the inventory. So we're all purchasing it ahead to try to give us time to get the execution of it. Many of our customers and their customers, the business hasn't been as aggressive as they thought. So to tell you the truth, I don't think there's been as much buying as I thought there would be given what they've done even prior because you started out back in January. So I think that describes what's happening at this point.

The next question comes from Keith Hughes with Truist.

Switching to Flooring Rest of World. You talked about some pressure in your panels business. I guess if we [ ex ] that out, how is the kind of core flooring business in Rest of World? Was it -- was some of the downside pressure less without those panels?

You're right. The industry volumes in our panel business remained slow, and we have continued price pressure in that business, although we can offset some of that with our higher-end decorative panels, which are growing and which are improving our mix. And then the second question on the European flooring market. The European flooring market remains difficult with low demand and price pressures in the market. There's a lot of promotional activities that are being utilized to maximize the volumes. We had improving laminate performance as we progress through the quarter. And we also installed a new laminate press that is more efficient and can produce the next generation of product features. And we're also continuing to expand our LVT distribution across multiple channels with new collections and customer relationships to compensate for the slow market conditions.

With EBIT in the flooring part of Flooring Rest of the World, would it have been up without panels or still would have been down like the whole segment?

I hate to speculate on the margin profile. But certainly, as Paul said, the improvement in laminate as we progress through the quarter and LVT would be margin accretive to our business.

Next question comes from Trevor Allinson with Wolfe Research.

It sounds like commercial end markets are still outperforming for you. At the same time, the leading indicator has been soft for a while here. So I'm curious on the pipeline there. Do you expect commercial to continue outperforming for the remainder of 2025 or anticipating that business soften here moving forward?

You're right that our U.S. commercial business performed well, and our U.S. commercial carpet tile and hard surface backlog at this moment remains strong, and that is led by the education and hospitality segments. We're making additional investments in sales activities to expand our specified business and our new product introductions, both in hard and soft categories have been very well accepted. The ABI index is currently below 50 and has been for a while. And we do expect going forward to the market to slow down a little bit. Our Rest of World segment has limited exposure to commercial, as you know, and so they're more exposed to residential.

Okay. That's very helpful. And then a question on pricing in your U.S. ceramics business, given there's a decent amount of import competition there as well. Are you taking prices higher in U.S. ceramics or expecting to push prices higher in that business? And then you called out some positive price/mix in ceramics overall in the second quarter. How much of that was a mix tailwind versus like-for- like pricing increases?

The U.S. ceramic business, a large part of it is imported, the world business, the industry's business is imported, they have the same impact of tariffs going up that they have to absorb and pass through. The U.S. business, we delivered solid results in ours, and we have put through selective price increases in our higher-value products earlier in the year to compensate for the inflation. Just to remind you the -- it has really high energy costs as part of it and the gas prices are up significantly over last year. And so around the world, we are implementing price increases selectively as we can to offset the rising costs.

In the U.S., it was, Trevor, fairly balanced between both price and mix.

Next question comes from Phil Ng with Jefferies.

Good to see the buyback in the quarter and upping the authorization. When you kind of think about the business as it recovers, free cash flow still pretty strong here. You guys have talked about being at the bottom of the cycle. What's your appetite to kind of dial it up? And how do you kind of envision deploying capital in the next, call it, 12 to 18 months? Is it more geared towards buybacks or M&A, reinvesting in the business, kind of help us think through how you're going to prioritize that next 12 to 18 months?

Well Phil, we'll continue really with a balanced approach on capital allocation in that we did buy back about $42 million in the second quarter. And with the new authorization, we'll continue to use that as part of our strategy. We'll increase investments in our business as the market improves. And hopefully, we'll have more opportunities to also acquire businesses as the environment strengthens.

Okay. Super. And then obviously, not a lot of visibility on tariffs yet, but at least it seems to have a potential positive impact on price. But what type of conversations are having -- are you having with your customers? Are you having more conversations to add shelf space just given your exposure on the U.S. side, manufacturing here? Does that create a better pricing umbrella. And when we think about the back half, you guys kind of alluded to perhaps there's some inventory in the channel, getting in front of tariffs. Is that something that we need to be mindful of that's a risk factor for you guys when you think about your business?

Yes. So we are indeed exploring commitments with customers in this environment to fully utilize our domestic capacity. And then to come back to the question, I think that Jeff already commented on, we didn't really see that much pre-buying from our customers. They have the ability to do that when prices increase, but currently, demand is slower than they expected, and they are limiting these additional purchases and our forecast includes that estimate.

The next question comes from Eric Bosshard with Cleveland Research.

A lot of conversation about price increases year-to-date and bullishness in the back half on price increases from you and from the industry. I'm curious what you're observing with consumer response to price increases, I guess, retailer distributor dealer as well as consumer response. If you're seeing units change in response to the price increases, if you're seeing mix change in response to the price increases? Or is it just as simple as passing through price increases and that sticking?

One is that the price increases are just flowing into the marketplace and understanding the reaction to it and what's going to happen with the consumer, it's too early to tell at this point. We believe that the imported products though will have to go up to reflect the costs and that our local manufacturing positions will be advantaged in that environment as we go through. The inventories in the system are all over and depending upon different companies' actions or not, it just makes it a little confusing as the prices flow through, but it will level out in a limited time.

What is your assumption in regards to -- as this pricing gets into the market, does it have an impact on volume? Does it have an impact on mix?

Well, we don't know the answer, the question and it's a valid question. The question to the whole economy is, that if you push all this price through, what's going to happen to the consumer and buying and is it going to be enough to stop it. On the other side, you have our category housing is at a cyclical low that people have postponed remodeling projects and that people need to change their living to match the way their lives have changed and they postponed it. So irrelevant of the economy, our category is at such a low point, we have to come out of it as people align with their needs.

Okay. And then the last question on -- I appreciate there's a lot of uncertainty around tariffs. The China tariffs seem a bit less uncertain. That seems pretty clear where those stand. In terms of how that is impacting your business and how that's impacting the competitive dynamic. Curious what you're observing LVT imports, for example, from China. What's going on with the price pass- through and what impact is that having in the market?

Most of the industries LVT indeed, is sourced from Vietnam, China, South Korea and Thailand. And so people are waiting for the final outcome of the tariff negotiations and will then adopt their supply chains. Currently, a number has been confirmed on China and so we have seen people move out of China into some of these other geographies that we have mentioned. But given the new tariff rates have not been finalized, we will have to adjust as required and see where things go from here.

The next question comes from Stephen Kim with Evercore ISI.

Just wanted to drill down a little bit more in Flooring North America. I guess, starting with volume, momentum had been building a little bit there, ex the order taking snap during 1Q, but we saw that kind of slow in this quarter. And so I'm curious, which products -- product categories in Flooring North America, would you say the slowdown was concentrated in? And on the flip side, you had a pretty exciting high-end launch in Flooring North America. I was curious if you could give us an update on how that's going.

So in the Flooring North America segment, definitely, our carpet performance and the industry volumes in carpet are at low levels, and that led to reduced manufacturing volumes and pricing pressure. And then the weak carpet performance was offset by strong performance in our laminate business and also by strong performance in our LVT business. So we really had hard surface outperforming soft surface.

And the high-end launch?

So the high-end launch is doing well. Like we said, we introduced a lot of high-end fashion products in the market, which is a market segment that they're still doing well. And so that launch is going in the market as we speak. And we have high expectations, and the launch is going very well.

Okay. And then price/mix was a headwind in Flooring North America in the quarter. I was curious how the breakdown -- how was the breakdown between price and mix? Did we actually see mix positive in the quarter?

Yes. So in Flooring North America for Q2, there was some favorable mix, but as Paul pointed out, with the pressures on pricing, it was offset by those pressures.

Okay. Got you. And then lastly, I had a question regarding the M&A pipeline. Basically, how is that looking? I know in the past, Jeff, you've talked about the fact that folks who -- owners are kind of reluctant to sell when the market is down. But as you pointed out, this is kind of been 3 years, and there are life situation changes that occur that oftentimes create opportunities. So I'm curious if you could give us an update on how your M&A pipeline is looking now?

They're still limited at this point. People's earnings are compressed. You have all the housing industry low, and there's a limited number of people and activity going on at this point. We would expect that to change significantly the same as it did in -- I think it was 2010 or '11 when it changed dramatically and came out, there were a lot of opportunities.

The next question comes from John Lovallo with UBS.

Maybe going back to Flooring Rest of World, it's pretty clear that some of the margin pressure was driven by the competitive pricing. But I wanted to kind of poke at it is that the sales were actually up about 10% quarter-over-quarter, which seems like it's better than normal seasonality and in fact, probably the best second quarter performance in a number of years. So just kind of curious what drove that strength in the top line.

Well, don't forget, John, you have to also consider the FX impact. So if you're just doing it on a reported basis, the euro really strengthened from where we started. If you go back to the last time we talked in the beginning of May to today, we saw considerable strength. So that certainly had an impact. And as Paul related earlier, our laminate business did perform better as we moved through the quarter as well.

Okay. Understood. And then in terms of the fourth quarter, you said that on a year-over-year basis, consolidated margins and EPS would be better year-over-year. I guess the question is, I think, historically, EPS has sequentially declined by, call it, 20% quarter- over-quarter in the fourth quarter. I mean, would you expect a little bit better than that? Or does that seem like that's still a fairly decent bogey for this year?

I think there will be differences this year with the impact of price increases, some of the favorable mix, but especially the restructuring benefits that we talked about earlier on the call. So the $100 million is fairly evenly split across the quarters. So that is kind of abnormal to the seasonality from Q3 to Q4. And one element that is helping when you look at our improvement or should improve from the prior year. Again, that also assumes there's no changes in the present trends.

The next question comes from Brian Biros with Thompson Research Group.

This is Kathryn Thompson in today for Brian. Stepping back and just taking a look at the bigger picture when it comes to imports and tariffs, I know that there's a lot of focus. But what percentage of your production for sales in North America today are manufactured in North America today versus, say, 6 to 8 years ago.

Obviously, that's been evolving over that time period, especially with the introduction of LVT. And you, of course, know how much market LVT has taken over time. Our focus is on today and as we've said, that when you look across all our product categories, about 85% of that production in the U.S. comes from the local manufacturing in North America. And again, that includes the Mexico operations, which fall under the USMCA.

Okay. So I guess what you're saying is it's difficult to put a number on that? Is there -- or even directionally, is there more net produced now because I do understand the LVT market share, James, but is it not more or less manufacturing in North America today versus 6 to 7 years ago.

It is difficult to say because of just the change in profile of all the products, but something that's been very consistent is our ceramic certainly, our carpets laminate products continue to be made predominantly in North America. So that has not changed over time.

Yes, understood. That would be a great detail to have just to be able to kind of assess the impact. Moving on to the recent bill that was passed, have you quantified or outlined potential ways that you could benefit? Or do you see this bill as a benefit, particularly for taking advantage of accelerated depreciation?

Well, if you think about the tax bill that was just passed, what it's doing is quantifying the changes that started in 2017. So we will take and continue to take full advantage of items like accelerated depreciation, R&D credits and such. But I think we're very much aligned with the articles in the bill to manage our tax exposure.

Okay. And I guess final question for today, a lot of focus on pricing actions and market share gains or losses and inventory. But on that, when you look at on how much of the market share gains or losses rather or attribute both the changes in the channel. So just shifting between yourself and others? And how do you see that progressing over the next 12 months given changes just in the mechanics of the channel?

If you're speaking just about North America, again -- so in Flooring North America, we think that we are in a solid position when it comes to each of the product categories, especially around, and that's why we focused on expansion in our laminate business, in our quartz countertops business to really leverage that manufacturing footprint.

In the channels, if you look at a broad based, the commercial channel continues to do better than the others. You have the new construction business, like all the data is slowing down. And then you have the multifamily business where you have a slowing of the construction that has been coming on for a long period of time. And then residential remodeling has been at a low point, and it's remaining at a low point. We need a catalyst for it to change.

The last question comes from with Rafe Jadrosich with Bank of America.

I just wanted to follow up on John Lovallo's question earlier, what is normal seasonality from 3Q to, I think, you said you expect normal seasonality for sales. Just what would that be, and sort of the same question for you, what would you consider normal?

When I look at sales from Q3 to Q4, normal seasonality is anywhere kind of a 5% to 6% decrease in sales that at a consolidated level.

And are there any shifts of like days or anything this year?

No. From a year-over-year perspective, there's not.

Got it. And then on EBIT, what would be the normal seasonality?

On an EBIT basis, when you look back over time, I mean, because of the holidays and Q4 across the globe, you could see a decrease again in the 25-plus percent area. And as I pointed out, the difference when our statement on Q4 is the benefit that we are yielding from our restructuring actions.

Got it. So better than that normal seasonality?

Yes.

And then I just wanted to just follow up on tariffs. If tariffs are sort of as they are in place today, like with what the current announcements are, how would you expect that to impact the short-term results? Obviously, like because it's FIFO accounting near term, you have -- your cost doesn't go up, but I think there might be more pricing. So would that actually help you near term? Or would you see cost inflation that comes through before you realize the pricing. Just how do you think about that, how that could play out if the tariffs hold as they are today?

The goal is to have them align and the question is do the industry act rationally and push it through, how do your inventory levels compared to different ones. And we're hoping that everything aligns like it's supposed to. But first, we have to find out what it is, and then we have to see how the marketplace acts upon it, and we'll take whatever actions to make sure we're competitive in the marketplace.

And as Jeff said earlier, because of the timing of the cost and it would be very minimal in the current year. And Rafe, you were asking about days. I just want to make sure which quarter you were talking about. Q3 over Q3 in terms of last year, there is no difference. Q4 versus the prior year, there is 1 additional day in 2025.

Okay. That's really helpful. And then just one more on the tariff side. The channel inventory that you spoke about last quarter how there's been some pull forward ahead of that, both from you and competitors. Like where is that today. Do you think that's mostly been worked down? Or just how would -- what's the update?

Well, in general, the importers are heavy on inventory because they wanted to get ahead of all the tariff announcements. And then from a sell-out perspective, as we said, some of our customers when we increase prices have the ability to prebuy. But given the slow environment with demand, they are making limited additional purchases...

Because they made them earlier. They already raised them and they don't -- can't do anymore as it...

This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Lorberbaum for any closing remarks. Please go ahead.

Thank all of you for your participation this morning. We're well positioned for the recovery that will occur and have a great weekend.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.